Category Archives: Finance

Let’s talk about money. Someone will probably call me insensitive or naive for posting this, but I don’t care. It’s important. Please keep in mind, I’m talking about people with normal to above average incomes, not senior citizens on SSI or single moms on state assistance. I understand there are hard cases.

I heard a 60+ year old man say this today…

When I was 18 I made a decision. I decided I never wanted to be under financial stress. I have lived that decision my entire adult life and have never experienced financial stress. How did I do it? I saved 50% of my take home income without exception. I’ve had months I’ve made $100, and other months I’ve made $100,000. But regardless, I still saved 50% of my income. My income has fluctuated but my saving percentage hasn’t. This has enabled me to purchase several business and a large ranch without incurring debt. I hear people say ‘I couldn’t possibly live on 50% of my income.’ Oh! baloney, you choose not to. Sure it’s harder once you have a 400K mortgage and kids in private colleges, but you decided to live that way. You don’t need to live that way. And if you had decided when you were younger to live differently, you could have your 400K home and private college today without a dollar of debt.

I’m not trying to preach. I don’t save 50%. But I know everything this man said is true. I could have saved more, and if I had, I’d be much better off today.

I’m aiming the following list at the 18-25 audience. Why? Most older people are already working like slaves to pay off debt and can’t imagine living on 50% of take home. A huge percentage of people are living paycheck to paycheck by 30 with college loans, cars, credit cards, and mortgages. Once you’ve accumulated your debt, living on 50% will become impossible due to the choices you made earlier and your financial stress may never subside. Creating financial freedom starts young, requires disciple, and must become a habit.

Here are some ideas you could use to help you save 50% when you are just starting out in life:

(Keep in mind that these lifestyle sacrifices would be temporary – delayed gratification)

Live in a small apartment with roommates

Avoid buying a car. Cars are money pits. If you must purchase one, buy a cheap used car with cash. Never buy a car on credit

You may not want to live this way, but you certainly could live this way, if you chose to.

Most people say they can’t live on 50% of their take home. When in reality, they mean they won’t live on 50% of their income because they aren’t willing to make the trade offs. Or maybe they don’t think the trade offs are worth it.

I genuinely want to discuss this with you. Is saving 50% reasonable? I don’t know if it is. That depends on who you are, right? But for many people it is possible. What would happen if your income was cut 50% right now? Would you go bankrupt? Would you die? Would it destroy your marriage? Or could you survive for years?

Today’s post was inspired by Episode 63 of The Focus Society of Overachievers podcast.

Financial intelligence is mostly counter intuitive. Take everything you feel about the economy and turn it on its head.

You’ve heard “buy low, sell high,” right? Sounds easy enough, but how do you do it? Most people buy high and sell low.

This is why the rich are rich and most of us aren’t.

The rich…
Sell when everyone else is buying. Buy when everyone else is selling. Save when everyone else is spending. Spend when everyone else is saving.

I just met an entrepreneur who positioned himself perfectly for this economy. He said,

“This is great, I just bought a 2.5 million dollar building for 800K. I
hired a dozen unemployed construction workers off craigslist to gut it
and remodel it. I just hired 5 .NET developers for half the price I
would have paid last year.”

What will you do next time? Mark my words, this will all happen again.

That’s how you build wealth. It’s simple, but most people won’t do it. The social pressure to spend when the Jones’ are spending is too great. Most people can’t bear to show up at hockey practice in an old mini-van, when everyone else has a shiny new Denali.

Then when the bust happens, they are broke and paralyzed by fear of unemployment and they miss out on the cheapest prices in a decade.

My neighbors are doing a major remodeling project right now. As I write this, I am looking out the window, and there are four pickups parked outside and even more men inside working. So in this economy, how can they afford it? I don’t know, but I can guess they saved during the boom and they are now paying half the price they would have paid two years ago.

Booms and busts are as certain as night and day. They are the natural cycle of economic life. Trying to rid the economy of booms and busts is like trying to rid the world of night and day.

This is simple if you build self-discipline and refuse to be herded into the latest stampede.

2006 was the top of the last boom. Most people I knew were buying new cars, buying new homes, remodeling, and spending like the good times would never end. About that time I had a conversation with a real estate agent about investment properties that went like this…

“Sooner or later the price of homes will drop.”

“It isn’t going to happen. It hasn’t happened since the 1930s.”

“Doesn’t mean it can’t happen again.”

“It’s happened in a few localized markets, but not one like ours.”

“What goes up, must come down. The higher it goes the farther it has to fall.”

“Unemployment would have to skyrocket and I can’t see that happening, not now. They are projecting a million more people in the metro area in the next 10 years.”

“Hmm, so buy now, it’s only going up?”

“If you buy this house (600K), it’ll be worth 30K more by the time you close. You can’t lose. You don’t want to get left out. Don’t leave money on the table.”

“I’ll pass.”

The words “you can’t lose” were the trigger.

You see, if I had done what I knew was right, I would have sold him my home and rented an apartment. I didn’t sell because it would have been too disruptive to my family and Christine’s business. In retrospect I
should have, I would have made a pile of dough, and right now I’d be buying the 600K house for 300K.

But no matter what you do, you can lose, and you should be willing to accept responsibility for your loss. Take calculated risks, not blind gambles. Responsibility for the results of your actions, good or bad, is the foundation of freedom.

I need enough to reach my goals. Money is an important tool. How much you need depends on your goal.

But what I wanted to say couldn’t be said in 140 characters.

When Christine and I bought our first house in 1994, I made $6.25 an hour. She didn’t make much more. I had big projects planned for that house. I thought – I might not have much money, but I can work hard, and I’ll fix this place up. This is an example of a classic working class mindset. We were taught that hard work alone can overcome any obstacle. It’s a lie. It can’t.

After a few months of home ownership, Christine and I joked that every trip to Knox Lumber to get supplies for a home project cost fifty bucks.

“Trip to Knox, fifty bucks!” We said.

To us fifty bucks was huge money. Although fifty bucks was worth a lot more in 1994, it still didn’t buy much. As you can imagine, our projects were small. A shelf, a curtain rod, some paint, a new number for the front of the house, and we could only afford one trip to Knox a month.

But I wanted to move the water heater, finish the basement, replace the windows, redo the siding, replace the carpet, add a bathroom, and landscape. And no matter how hard I worked, I couldn’t make those things happen. I didn’t have the money.

Seven years later we were able to make many of these changes, not because we worked hard, but because we had the money.

Now you might be thinking, “Yeah, but you had to work hard to get the money, right?”

No! I have never worked harder in my life than when I made 6-8 bucks and hour. And no matter how hard I worked, I couldn’t get ahead.

To make more money I had to change the way I thought, the way I thought about myself and everyone else. I had to learn to value knowledge over manual labor, be open minded, make partnerships with others, leverage technology, and work smarter. I found better ways to contribute than selling my time for money. I lost the idea that hard work was a value unto itself.

When I did get my home improvement projects done, I had the money to pay skilled craftsmen to do them for me.

When you hear someone say, “Money isn’t important.” Don’t argue, but remember to tell yourself, “yes it is important.” Money is one of many tools you will need to reach your goals. It doesn’t matter if your goal is to end poverty, build a skyscraper, play in a rock band, or start an internet company, you need money. The amount of money you need is dependent on the size of your goals.

There is no such thing as a person having “too much money.” Too much debt, maybe, but money and debt are different things… (Well… I guess money is debt in America, but that’s another post for another site.) At any rate, your money and your debt carry very different implications for reaching your goals.

Never ask,

“How much money does a person need anyway?”

Instead ask,

“How much money do I need to reach my goals?”

Then be smart, gain some knowledge, invest in yourself, and focus on acquiring that amount.

Glad to hear you, Dawud Miracle, and the previous two posters are
doing so well, but I must say this is a depressing post to read after
having spent twelve hours every day for the past five days pounding the
pavement looking for a new job. I was recently laid off due to the
“hype,” and If I don’t find something in the next couple of days I
won’t be able to pay rent and will literally be on the street (medical
bills for family and myself have drained my bank account dry, and some
recent deaths in the family have left me stranded in an unfamiliar
city/state).

To whatever degree you choose to believe it, these hardships exist. To REAL people even – people like me.

“Right now you have more opportunity than you may ever see again.” Oh, Mr. Olson… if you could only walk a mile in my shoes…

Continued successes to you and your friends/family.

Take care.

It appears Elisabeth hit an ugly storm of unemployment, poor health, death, while stranded and alone. Elisabeth misunderstood much of what I wrote. That is my fault, I hope she will give me a chance to clarify. In no way, did I mean that hardships do not exist. Suffering exists, no doubt.

A post from Christine Olson (who is going to be posting here much more often)

How can you make more money?

We all could use some more cash right now, right? Sometimes friends, family and neighbors ask “How can I can make a few extra bucks for some Christmas spending money?”

$500 – $1500 selling clutter

Most of us have too much clutter. Why not turn it into cash? Almost any parent has at least $500 or even up to $1500 worth of junk sitting around the house they can sell. Between Craigslist and eBay there is no excuse to not create some extra cash this Christmas Season.

The Nelsons jumped at the chance to take more than $100,000 in equity from the house they originally purchased in 1999 for $117,000. The new 2005 mortgage was for $240,000. They applied for another 30-year fixed-rate loan, but they say their broker told them they only qualified for an Adjustable Rate Mortgage (or ARM).

They “jumped” at the chance to dig themselves $123,000 deeper into debt on an adjustable rate mortgage? I barely passed the 8th grade and I know that’s foolish. At 25, when I purchased my first home, the broker told me I could buy a bigger house in a better neighborhood if I took an ARM instead of a conventional mortgage. I saw the obvious risks and said no. But this next paragraph really gets me…

They had been lured in with a so-called teaser interest rate of 6.9 percent. The monthly payment was about $1500. It was steep, but Shawn and Roxanne managed. They didn’t realize that the rate would jump to 8.9 percent after just two years and readjust every six months after that. Shawn sighs, “Signing all those documents, I couldn’t tell you what I signed.”

They were lured? To me “lured” is what a pervert does to a child using a bag of candy. It implies something sinister and immoral. Wouldn’t “offered” be a little less biased?

Then… He couldn’t tell you what he signed? Whose fault is that? He didn’t say the lender lied to him, he said he didn’t know. Whose responsibility is it to understand what you are signing? I bought my first house when I was 25, my wife slung hash at a burger joint, I drove a truck, and I had enough sense to pay an attorney $400 bucks to come to the closing and look at every piece of paper I signed and explain it to me. It was worth it, because he saved me over a $1,000 in closing costs and prevented me from signing several unnecessary agreements.

In the fine print of one of the documents they signed in 2005, was a pre-payment penalty. It would cost the Nelsons an additional $3,000-$4,000 to pay off the ARM with another mortgage. It is money they don’t have.

He didn’t know there was a penalty for early payment? Whose fault is that? Did he ask? Did he read the documents?

The biggest problem facing Shawn and Roxanne is a move by their mortgage company that they caught them completely by surprise. The lender ordered an appraisal of the house in 2005, but only notified the Nelsons of the amount in 2007. The house was appraised at $268,000. The effect of that appraisal is to make any new refinancing almost impossible. The Nelson’s spoke with realtors who told them the house could sell for no more than $225,000. Since the Nelsons’ mortgage was for $240,000, there is no equity left in the home.

He didn’t ask to see the appraisal value before he signed the mortgage? They make it sound like he didn’t understand the amount of his loan, the interest rate, the payment terms, and the value of the home. Maybe he didn’t. But whose responsibility is it to ask? The article goes on to blame the mortgage company for the $268,000 appraisal, but home values have dropped since 2005. Having a mortgage that is higher than the value of your home is always a risk, especially with nothing down. It’s common sense.

“We cannot afford that at all. At this time, I’m the only one working. My husband’s a teacher and he’s laid-off at this time.”

Earlier in the article, he says he has a degree and is working on his masters… I’m sorry… but cmon’… I live in Minnesota…unemployment is very low. He could find a way to make some money, it might not be the teaching job he wants, but he could contribute financially. There is a way.

Shawn lowers his head. “The hard part for me is knowing that I’m supposed to be providing for my family. We got ourselves into this situation, but it’s not because of something we did on purpose.”

Huh? Shawn may not have planned it this way, but his decisions caused it.

Who took out a $240,000 ARM without an income?

Who failed to question the interest rate and the risks?

Who failed to ask if there was a penalty for early payment?

Who failed to question and understand the appraisal?

I am baffled by this. While I can’t believe any lending institution would borrow loan Shawn this amount of money, I am equally baffled by an educated teacher who understands so little about personal finance. I could understand if it was an elderly person, or someone mentally deficient, or even someone unfamiliar with our language and culture, but this guy has no excuse.

I met another guy last year who told me a lender offered him a $300,000 ARM with nothing down which would have created a 55% debt to income ratio. Think about that? After SSI, medicare, income taxes, and your mortgage payment you’d be living on 10-15% of your income (the home maintenance alone will cost another 10%). It is irresponsible to make these loans, but it is also irresponsible to take them when it is clear you can’t afford them.

When I started looking for a new home in 2004, I hadn’t shopped for a mortgage in 10 years. In 1994 lenders would not allow a borrower to extend themselves past a 32% debt to income ratio. So in 2004 when I asked my mortgage guy how much I could afford, I was stunned when he said, “pretty much whatever you want.”

I asked for clarification, “I can borrow any amount I want? 700K? 800K?”

“Yes”, he replied.

“What about debt to income ratio?” I asked.

He said, “Don’t worry about it, we can find a way around that. It just doesn’t matter as much as it used to.”

I instantly realized that game had changed in the last 10 years. While the lender used to show restraint on loan amounts, now I needed to show restraint and judgement. We decided not to extend ourselves past a 25% debt to income ratio and we bought far less than we could afford.

In retrospect, I still paid too much for my house because similar houses in the area are now selling for less than we paid. But that was the insanity of the 2004 market – everyone was paying too much and it happened to be the year we needed more square feet to expand Christine’s home business. But we’re still okay financially because we didn’t buy the home as an investment, and we didn’t over extend ourselves.

The housing market correction is going to be painful for many people, but most have no one to blame but themselves. No one forced them to pay over-inflated prices with risky mortgages; they did it voluntarily. They may have done it because of financial ignorance, but for educated people in the information age, there is little excuse for financial ignorance.

Sorry if that came across and little mean and arrogant… but sheesh! These “victims of a predatory lender” stories drive me nuts.

I wish to share this simple piece of information that has saved me thousands of dollars over the past several years.

Yesterday my vehicle check engine light turned on and I knew what to do.

I have never owned a new car; I always buy used. I usually buy an American model lease back or rental return with around 25,000 miles on it which saves me $10,000 – $20,000 on each vehicle purchase, and that allows me to stay out of debt (which my wife and I abhor). The risk is that the factory warranty expires 5,000 – 10,000 miles after purchase, so I could end up with a useless car less than a year after purchase, but that hasn’t happened.

What has happened is the check engine light frequently lights after the vehicle exceeds 50,000 miles. In the past when this happened, I always took the vehicle to a dealership to have them diagnose and fix the problem. I’d have to make inconvenient commuting arrangements since I’d loose the car for 1-2 days, and a repair was required that cost between $500-$2000 dollars. Since I am a mechanical know-nothing, I accepted the dealer’s word, made the repair, and paid the bill. I don’t recall how many times I’ve been through this repetitive cycle, but it’s been often enough to cause me a lot of frustration.

I don’t remember where I learned this, but several years ago, I learned that I didn’t need to go to a dealership or another garage to find out why the check engine light was lit. I didn’t even need to buy any special equipment to find out why it was lit.

Today I take the car to an auto parts store like Auto Zone or Advance Auto Parts and tell the guy at the counter that my check engine light is on. He plugs a handheld electronic device into my car, and tells me why it is lit. Several times, it said “emissions problem” – translated – A LOOSE GAS CAP! We tightened the gas cap, reset the light, and it didn’t light again for months. Other times it was a plug misfire, which can be a complete aberration. Again, we reset the light and it didn’t light again for months. A couple times, repairs were required, but at least I walked into the dealership with knowledge, which helped me keep the cost down. With knowledge of the problem, they couldn’t B.S. me.

The best part – it’s something you can do in five minutes that may save you thousands of dollars.

You can also buy yourself your own inexpensive Diagnositc Code Reader.

As I was commuting to work this morning, I thought – How much does it cost me to drive to work? Not the gas, the car, and the taxes I pay for the road, but how much does the lost opportunity cost me? If you took Economics in College, you likely learned about opportunity cost.

In economics, opportunity cost, or economic cost, is the cost of something in terms of an opportunity forgone (and the benefits that could be received from that opportunity), or the most valuable forgone alternative, i.e. the second best alternative. – Wikipedia

In this post, I am only going to look at opportunity cost, not environmental cost, not social cost, nor other externalities. What does it cost you in lost opportunity to commute to work based on what you know today?

My first example is a couple I know that purchased a house in a location that requires them to commute 1.5 hours to work each way. So they commute 3 hours every workday.

The opportunity cost based on the above definition is the dollar value amount they produce per hour when producing goods and services (this is the economic value of an hour of their time). Since they are skilled technology workers we will set that at $100 per hour for the couple. Since they are both knowledge workers, they don’t need to be in any specific location to be productive, all they need are the tools to be productive, computers, software, and network connections. Based on this information I came up with formulas for the cost of commuting.